Re: [bitcoin-dev] Hardfork to fix difficulty drop algorithm

[Tier Nolan <tier.nolan@gmail.com>]

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On Wed, Mar 2, 2016 at 4:27 PM, Paul Sztorc via bitcoin-dev <
bitcoin-dev@lists.linuxfoundation.org> wrote:

> For example, it is theoretically possible that 100% of miners (not 50%
> or 10%) will shut off their hardware. This is because it is revenue
> which ~halves, not profit.


It depends on how much is sunk costs and how much is marginal costs too.

If hashing costs are 50% capital and 50% marginal, then the entire network
will be able to absorb a 50% drop in subsidy.

50% capital costs means that the cost of the loan to buy the hardware
represents half the cost.

Assume that for every $100 of income, you have to pay $49 for the loan and
$49 for electricity giving 2% profit.  If the subsidy halves, then you only
get $50 of income, so lose $48.

But if the bank repossesses the operation, they might as well keep things
running for the $1 in marginal profit (or sell on the hardware to someone
who will keep using it).

Since this drop in revenue is well known in advance, businesses will spend
less on capital.  That means that there should be less mining hardware than
otherwise.

A 6 month investment with 3 months on the high subsidy and 3 months on low
subsidy would not be made if it only generated a small profit for the first
3 and then massive losses for the 2nd period of 3 months.  For it to be
made, there needs to be large profit during the first period to compensate
for the losses in the 2nd period.

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